Reaching the PeakPeter McKenzie-Brown
September 02, 2008
As EnCana prepares to hive off its oilsands business, Brian Ferguson prepares for life atop Canada's newest bitumen mountain.
Brian Ferguson is almost perfectly decked out to play the part of the Stampede cowboy. Balding slightly but rugged looking, he’s wearing Wranglers and a yellow-and-blue checked shirt. Something’s missing, though: the big-buckled belt. With an easy charm he chuckles: “I’m travelling today, so my wife Cindy made me leave it at home.”
I am interviewing him at the Calgary International Airport. As I prepare for the interview, I recall the excitement at the beginning of 2002, when two of Canada’s most successful independent producers, PanCanadian Energy and Alberta Energy, pull off the largest merger in Canadian oilpatch history – a $27-billion deal. Overnight, EnCana becomes the world's largest independent petroleum company, the largest driller and explorer, the largest gas producer on the continent, and the third-largest industrial conglomerate in Canada. The merged entity is an energy powerhouse.
Beginning in 2006 and under the leadership of a new CEO, Randy Eresman (who promotes Ferguson to executive VP and CFO), EnCana goes through a series of equally dramatic changes. The company sells off the last of its properties in 22 countries overseas (including excellent assets in the North Sea). Then, taking the industry by surprise, the company announces an asset exchange with ConocoPhillips, through which the two companies form a 50/50 bitumen production and refining partnership. Now exclusively North American, EnCana announces that it will split into two companies, with the formal creation of the new entities taking place on New Year’s Day, 2009.
Plus ça change, plus c’est la même chose? Or, in English, is this another case of the cynical French epigram – “The more it changes, the more it is the same” – in action? Anything but, according to Brian Ferguson. He will serve as president of the provisionally named IntegratedOilCo (IOCo), which will have market capitalization of about $29 billion. Randy Eresman will serve as CEO of the other new company – twice as big, and provisionally called GasCo.
Although he is still EnCana’s executive VP and CFO, in practice Ferguson has already taken on his new job. I ask why EnCana is breaking up. “This is about focus,” he says. “This is the next natural step in EnCana’s evolution of continuing to increase our focus. The business drivers that are going to be necessary to be very successful for the exploitation of tight gas and shale gas are different drivers from those that are going to be required for exploitation of the oil sands.” For that reason, Eresman’s new company will focus exclusively on natural gas production, which will include liquids extraction. IOCO will be an integrated oil company with enough gas assets to make it a substantial producer – about 860 million cubic feet per day – in its own right.
“In 2003 we started focusing the company on what we did best, where we had competitive advantage and especially where we were generating really strong rates of return,” Ferguson continues. “At the time of the merger we were active in 22 countries around the world. When we looked at our portfolio we found that we were doing really well in the development of in situ oil sands and in the development of natural gas resource plays right here in our own back yard – in North America. We sold $13 billion dollars worth of assets, so that our reserves were focused in tight gas and shale gas and in situ oil sands” on this continent.
He adds, “Over the last few years the world has become a more difficult place. It’s become harder and harder to do business outside North America, which anyhow is the world’s largest energy market.” Before the split, EnCana’s competitive advantages include the largest land base in North America. Focusing on this continent gives the company lower political risk and greater predictability.
A chartered accountant by background, Ferguson is quick with numbers and financial concepts. “There is a preference for focused pure-play companies in the financial marketplace,” he says. “The split will allow for greater transparency and disclosure (in terms of) operating and financial performance and the value that is being created for these two businesses.”
The problem with EnCana as it is structured today, it appears, is that “the gas company has tremendous growth in it. It’s about 80% of our business today. It has tended to dwarf the success and growth of our integrated oil business, which we expect to grow at a compound rate of 20% over the next decade.” Under the new arrangement, “the market will focus on choosing the best companies in both groups – oil and gas.”
Integration: I ask him about the unusual decision – for a Calgary-based petroleum producer, at least – to become an integrated company. “We wanted to remove risk and get more predictability in the cash flow stream,” he says. Again, you can hear the accountant speaking. “We have a tremendous resource base – more than 40 billion barrels of oil in place on existing EnCana land. We wanted to reduce the risk associated with investing billions of dollars in the upstream and being just a pure bitumen producer. How do we manage that risk in terms of the volatility of the heavy oil differential to give us the confidence that we can go to full development of our resources? We decided that our best bet was to find a dedicated home and a very experienced partner in the downstream.”
The partnership’s refining assets are at Wood River, Illinois (153,000 barrels per day net to EnCana) and Borger, Texas (73,000). How will the decision to develop this partnership affect the company’s bottom line? “Each year, profitability will be different. Last year our 50% interest (in these downstream assets) generated more than $1 billion in operating cash flow, which was substantially higher than the upstream cash flow. That changed this year because crack spreads” – the margins that a refinery can earn by “cracking” (refining) a barrel of oil into such marketable products as gasoline, jet fuel and heating oil – “are narrower in 2008 and oil prices are higher. So we will probably generate a disproportionate amount of cash flow out of the upstream. However, this has removed risk from the upstream business.”
Ferguson is warming up to the topic of integration. “It gives us a lot of strength,” he says.”We are not only integrated in the sense of producing bitumen and taking that from the wellhead through the pipeline to the production of transportation fuels. Also in our oilsands operations we consume a lot of natural gas and our refinery consumes a lot too, so we are economically integrated in the sense that we produce a lot of natural gas as well. And if you take it one step further in terms of that integration we also have the sequestration project, so we are integrated in terms of carbon, too.”
The sequestration project he is referring to is the one at Weyburn, Saskatchewan – an EnCana asset. The 50-year-old Weyburn oilfield uses a 330-kilometre pipeline to transport carbon dioxide captured at the Great Plains Coal Gasification plant, which manufactures methane from coal near Beulah, North Dakota. The world’s largest carbon capture and storage (CCS) project, the Weyburn project disposes of about 1.5 million tonnes of carbon dioxide each year and keeps oil flowing from the field. North American policy-makers are increasingly asking energy companies to show their environmental commitment through such projects – whether they make economic sense (as this one does) or not.
I ask Ferguson about environmental issues. “There is no question that environmental concerns will continue to heighten, continue to grow,” he tells me. “There is no question that the environmental and reputational matters for the oil business and the oilsands in particular are going to be different from those in the gas business.” Now he gets back on message. The new business arrangement “enables us to focus on the business drivers, and one of those business drivers is environmental stewardship and environmental performance. I think it’s an area where we will be able to distinguish ourselves from virtually all of our competitors. All of EnCana’s oil sands operations are SAGD (steam assisted gravity drainage), and they are characterized by a smaller environmental footprint in terms of water consumption and land use. We also have our Weyburn oil sands project, which is the world’s largest carbon sequestration project.”
EnCana’s oilsands production has grown from virtually nothing to 30,000 barrels per day (net to EnCana, reflecting the arrangement with ConocoPhillips) in the last 13 years. I ask whether this is primarily because of technology or geology. In effect, he says, both. “Our projects at Christina Lake and Foster Creek both have two extremely high-quality reservoirs. Foster Lake has no top gas and no bottom water and it’s a very thick formation – 30 or more metres thick. Christina Lake approaches 40 metres in thickness. We acquired these assets many years ago.” On the technology front, “we have the longest history of commercial SAGD production, about 12 or 13 years. We’ve had a lot of time to understand and pilot and perfect the techniques we need to develop the reservoirs.”
Since Foster Creek began commercial operations in 2001, its production has grown to about 60,000 barrels per day. It should reach 65,000 barrels by the end of this year and 100,000 barrels next. Christina Lake is expected to climb from about 7,500 barrels per day now to about 18,000 by year-end. Foster Creek and Christina Lake are owned 50-50 by EnCana and ConocoPhillips. Ferguson expects the partnership’s total production from these two assets to approach 400,000 barrels per day by 2015.
The Price of Planning: There has been a lot of speculation in the business press that, by splitting the companies, IOCO will quickly become a takeover target. What does Ferguson think about this? “There is a very low probability that either of the entities would be taken over. The smaller company is going to be a larger company in terms of market capitalization than EnCana was when it was first formed in 2002. It’s not something I spend a lot of time worrying about. One of the reasons we are doing this now is that we want to do it from a position of strength, both operational and financial.”
What does Ferguson think about today’s high commodity prices? He’s clearly given a lot of thought to why they stand at such lofty levels. “The key thing is that reserves that were relatively easy to produce have been found and developed. The big thing as we go forward will be continuing advances in technology. This applies to both the demand side and the supply side: anything that makes things more efficient will reduce demand and anything that helps us commercially develop reserves will help supply. What you are seeing today is a demand-driven expansion of commodity prices in an environment where there is relatively little ability to expand supply to meet the demand growth. It’s just about supply and demand. Asian countries like China and India are becoming very energy thirsty. The new demand coming out of Asia is something virtually everyone in the oil industry had underestimated.”
Will these prices last? “We think for planning purposes $8.50 gas prices and $85 WTI for longer-term planning purposes is reasonable.”
We have completed the formal interview, so we spend a few minutes shooting the bull. Brian Ferguson is a pleasant and friendly sort, but I am curious about his personal life. “What’s the last book you read?” The answer surprises me: Angels and Demons – Dan Brown’s prequel to The Da Vinci Code. It turns out that Ferguson is a science fiction fan; his favourite author is Stephen King.
He’s also fit. He does snowboarding and downhill skiing in the winter; cycling, jogging, hiking and waterskiing in the summer. Any exciting plans for the summer? “My wife Cindy and I are hiking the skyline trail near (Banff Park’s) Maligne Lake this weekend, with some friends.” And another thing: The family, which includes daughter Lindsay and son Brett, are going to Tanzania to climb Kilimanjaro. Just another peak for Ferguson to conquer.
September 02, 2008
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